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Current and Retirement Budget

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Financial planning consultation services, based in California. http://abouterroldmoody.weebly.com/ …

Financial planning consultation services, based in California. http://abouterroldmoody.weebly.com/

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  • 1. Errold Moody PhD MSFP MBA LLB BSCE Current and Retirement Budget Of all the issues impacting retirement, the amount of money you project to spend during retirement has a significantly greater impact on the amount of funds needed than the projected inflation rate, return on investment or anything else. Further, using a rule of thumb- say 60% to 80% of current budget- is invariably a simplistic method designed for very superficial analysis and should never be used for any long term planning. If you are off "just a bit", the amount of funds you believe you will need may not remotely match the funds you will spend during retirement. You don't want to find out at 70 years of age that you are going to run out of money in the next five years because you didn't do the number properly when you were 50. It's too late at that point to make adequate adjustments. (For the purists, I understand that there is a lot of “compromise” and “guesstimates” with some figures and that the projections of inflation and returns in the future are also based on unknown rates. That said, if the budget- which can be determined with some exactness- has no real life element, the whole process can be wasted.. Further, if the retiree/investor refuses to so the necessary homework, the analysis will tend to be valued accordingly.) The following is the most detailed budget currently in use. It may take quite a bit of time to get all the figures (remember some of your payments may be made only annually and you therefore must track down payments made many months previously). Now this is how you do retirement budgeting. Look at each one of the line items. See how they might change when you retired. One example is clothes purchases. You obviously are not going to be buying lots of new clothes- certainly business suits- and you should reduce the amount accordingly. Maybe you are going to retire to Florida where you can forget snow removal- by the same token your utilities will be higher in the summer due to air conditioning. The point being is that you simply don't take 65% or 75% of current costs because there are too many factors impacting the decision. So take your time before putting just "any" number in the retirement column. Add up the numbers when through and you should have a pretty good budget on which a good plan may be developed. I also know that the younger you are- certainly age 45 and under- the more difficult to determine valid retirement numbers. But you have to start someplace. For those 45+, the need to focus on retirement numbers is mandatory and you have no choice but to complete carefully. Expense Item Current During Retirement Food Groceries Alcohol/Tobacco Restaurants
  • 2. Personal Work related Appliances and Cookware/Kitchen Entertainment and Recreation Vacations Travel Recreational Equipment/Activities Biking/Kayaking/Fishing/Hunting/Hiking Sporting events Movies/Theater Parties Hosted in home CD's/tapes Fitness club Cable TV Country Club Computer New computer Upgrades Software Repairs Supplies On line services Miscellaneous Supplies Gifts and Contributions Religious and Charities Political causes Family gifts/birthdays Non family gifts Christmas gifts Transportation Car payments Auto Maintenance Auto Insurance Parking Parking Tickets Parking Permits Public transportation Carpool costs Taxes and Fees Tolls Gas Oil
  • 3. Registration Clothing Mending/repair Dry Cleaning/laundry New purchases Shoes Work Clothes Childcare/parent/dependent Care Daycare Cleaning Medical care Babysitting Personal Care Hair Care Toiletries Personal care appliances Pocket money allowances Massages Education Newspapers Education/training expenses Books Magazines Professional Dues Personal Tuition Personal Room and Board Child tuition & Room and Board (Current) Child tuition & Room and board (Future) Miscellaneous Supplies Obligations Income Tax Medicare Social Security State Tax Consulting Fees Tax preparation Other Tax Life Insurance Term Whole Life Universal Life Variable Index Disability Insurance Umbrella insurance Credit card fees Credit Card Payments
  • 4. Interest Principal Finance Fee Cash fee Alimony/support Child Support Child care Child Allowances Business expenses Attorney fees Accountant fees Other debts/loans Union Dues Storage Fees Postage Savings Personal Savings Retirement Savings Company stock/options 401(k) TSA's (403(b)/501(c)3)) IRA's KEOGH SEP Investments Individual Securities Mutual Funds Real Estate Annuities Fixed Variable Home Home mortgage/rent Interest Principal Maintenance Furnishings Gas Oil Electricity Telephone Property Insurance Fire insurance Earthquake insurance Flood Insurance Umbrella/liability insurance Contents/personal property insurance
  • 5. Property tax Condominium Fees Water Sewer Well Maintenance Septic Tank cleaning Mowing Service Landscaping Service Snow Removal Second Home (repeat above) Medical Hospital Physician Dentist Prescriptions/Vitamins Health Insurance Medigap Insurance Pets Veterinarian Food Board and Care SUBTOTAL MISC. 5-10% of subtotal (May seem excessive and will need to be addressed with adviser. However, I think that medical costs and the like might fit in here since they have been escalating beyond all reason. And if not that, why not something else over 20- 30 years? Note that I included parent care along with child care. This is not just a financial burden but a huge emotional and physical burden mostly on women. One might even want to include something for respite care. Notice pets- we really tend to keep them for a much longer time than in the past and the costs can be substantial. TOTAL CURRENT YEARLY EXPENSES Current Yearly Expenses MINUS Federal and State Tax= After Tax Current budget This budget is then used by an adviser to determine what type of risk/investments are needed to fund retirement. You do not need to take more risk than is absolutely necessary. That said, current economics plays a major part. Bond funds had traditionally provided some reasonable return. But with the FED increasing interest rates for many years to come, it will be necessary to reevaluate portfolios frequently. See also DCAD- Dollar cost averaging down- which is mandatory in keeping losses to 10% to 15% in the worst of recessionary climates.

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